Chinas Economy: the Government and the Central Bank China - Research Paper Example

GOVERNMENT AND CENTRAL BANK OF CHINA’S ECONOMICAL CONTRIBUTION By Location Government and Central Bank of China’s Economical contribution Both the government of the People’s Republic of China and the Central Bank of China have played a very important role in the development of the economy of China over the past two. The Central Bank of China has the responsibility of managing the country’s currency, interest rates, and money supply. The central bank also performs the duty of overseeing the commercial bank system within China. All these activities have a direct impacton a country’s economy. The government of China, mainly influences the economy of the country by coming up with economic policies that govern economic activities within the country. This paper aims at discussing the extending to which the Government and the Central Bank China have been successful in managing China’s economy over the past two years. It will also describe and evaluate the main macroeconomic policies used by the Government and Central Bank of China over the last two years. China’s annual economic growth remained robust in the year 2013. However, the growth continues to gradually loss its pace. Growth was stable at 7.7% for the year, which was identical to the rate in 2012. However, the rate exceeded the government’s indicative target of 7.5%. Moderation of growth rates from a decade of average annual growth of about 10% reflects a structural transformation of the country’s growth model. A rebalancing of growth of investment to consumption and from industry to services continues, but there are challenges and rebalancing is slow. Investment returned as the main growth driver, helped by an uptick in investment in infrastructure and real estate in 2013. Quarterly economic growth has become more volatile, which is an indication that rebalancing is not progressing smoothly. The first half of 2013 marked a deceleration of economic activity, largely related to a weakening of domestic demand, though an economic support program aimed at promoting public infrastructure expenditures and tax incentives for SMEs enhanced growth in the second half. The growth momentum henceforth started to slip again as monetary policy and accommodative fiscal impulses are fading. Growth in the first quarter of 2014 decelerated to 7.4 percent or 1.4% from 7.7% or 1.7% in the last quarter of 2013World Bank. (2013, p. 342). Recent monthly indicators suggest that growth has stabilized and growth momentum is expected to accelerate in the second quarter of 2014. Monetary policy in China has been accommodating over the past two years. However, the credit impulse is decreased as administrative regulations took control of credit growth. Broad money growth has remained robust. The authorities have introduced measures in order to ease liquidity conditions. In April Broad money growth increased to 13.2% from 12.1% in March. The growth of aggregate financing, formerly called total social financing decelerated from 19.4% in 2012 to 17.8% in 2013. Bank loan growth (in RMB and foreign currencies) edged down to 13.5 percent from 14.1 percent in 2012. However, credit products associated with China’s shadow banking system continued to surge by 31 percent in 2013. Barely available a decade ago, shadow banking, credit now accounts for 25% of aggregate financing. In the first quarter of this year, the growth of aggregate financing decelerated further to 16.2%, with bank loan growth coming off further to 13.2%. Shadow banking growth also decelerated, to 24.8%, as the authorities introduced more administrative regulations to regulate non-bank credit growth. A weakening of the credit impulse is a drag on investment. After the global economic crisis, the FAI growth for China has become morereliant on development in aggregate financing. This is a trend that had not beenexperienced before 2008. Like other central banks, the People’s Bank of China monitors economic and financial conditions on a continuous basis in order to assess the essence adjusting in the stance of policy. However, the PBC does not have a fixed timetable for policy announcements. The instruments used by the PBC to adjust the overall stance of policy include: banks’ reserve requirements; benchmark interest rates on bank loans and deposits; open market operations; and window guidance on banks’ credit creation activities. This is different from the way that monetary policy is implemented in most developed. The PBC directly sets benchmark interest rates on Chinese banks’ deposits and loans, with the benchmarks differentiated by the term of the deposit or loan. The benchmark rates are a significant determinant of actual deposit and loan rates and so influence both the supply of bank deposits and the demand for bank loans. Benchmark rates previously set a ceiling on deposit rates and a floor on loan rates, although there were exceptions to these rates. Recent reforms have eased these restrictions by allowing banks to pay up to 1.1 times the relevant benchmark rate on deposits, and charge lending rates as low as 0.7 times the benchmark. Benchmark interest rates affect the rates faced by business organizations and households, though many lending rates were more than the benchmark, with the spread to benchmark lending rates influenced by a range of factors including the risk profile of borrowers and the general availability of funds in the market. Although a managed float exchange rate regime means that the domestic money supply is driven by developments in the current account, the use of tight capital controls in China provides the People’s Bank of China (PBC) with the ability to ‘sterilize’ the effect of balance of payment flows in the domestic money supply. Moreover, given the dominance of the regulated banking sector in China’s overall financial system, the People’s Bank of China’s control of a range of regulatory and market instruments that affect banks’ funding and loan availability has enabled it to assert considerable influence on the amount of money and credit in the economy and therefore macroeconomic outcomes. The primary purpose of macroeconomic demand management is to support economic growth in China. Macroeconomic demand management can also be some form of response to fluctuations in global and domestic business environments in order to sustain domestic employment and decrease the possibility of there being an excessive build-up in inflationary pressures or financial risks. Just like in any other economy, policymakers in China use various fiscal, monetary , regulatory and policy instruments to manage aggregate demand (Li 2014, p. 1). However, the operation of macroeconomic policy is different in a number of significant ways from that in the majority of developing economies. This is because of the differences in institutional characteristics and the stage of development of the Chinese economy. In comparison to the typical arrangements in developing economies, Chinese monetary and fiscal policy is tightly managed by the central government. Moreover, in the area of monetary policy, the managed float exchange rate regime depends on significant restrictions on capital flows.The relative dominance of banks implies that monetary policy can be largely implemented through a range of regulatory instruments. Nonetheless, as the Chinese economy has developed, there has been a gradual evolution towards the use of market-based policy instruments like those used in more developed economies (Holmes 2014, p.223). The Chinese Government has signaled its intention for this evolution to continue in line with developments in the economy and financial markets in particular. An economic support program in mid-2013 that aimed at boosting government expenditures was influential in stabilizing growth. However, the program also slowed economic rebalancing, as investment reemerged as the main growth driver. China’s headline indices of investment are fixed asset investment.It is a broad measure that is inclusive of purchases of used capital and land sales increased by 19.57% in 2013.This was a slight decrease from 20.591% in 2012. Much of the slowdown came from slower investment in manufacturing, at 18.5% from 22% in 2012 (Murray 2014, p. 211). There was a general increase in infrastructure investment from 12.9% to, to 16.9%. Additional spending on high-speed railways was responsible for offsetting the decline in capital spending elsewhere. Real estate investment also picked up in 2013, to 19.8 percent from the year-earlier 16.2%. This tradeoff between maintaining a high performance economy stable and limiting the growth of excessive credit has influenced liquidity management to be challenging. Central bank efforts to monitor risky lending and credit-product creation led to spiking of interbank rates in June and December 2013. The same happened in January and February 2014. In January 2014 the PBC focused on anxieties in the interbank market by acting on timely liquidity injections and making known its policy intentions (Pettis 2013, p. 333). In March and April interbank rates were relatively stable. Despite the fact that monetary base increased, inflation was stable in 2013 and inflationary pressures is subdued. Annual consumer price index (CPI) inflation reduced marginally to 2.6% in 2013 from 2.7%. This was mostly as a result of moderation of price increases of food products. there was a 2.3% decline in CPI inflation in the first quarter of 2014 due to a moderation of food prices. In April there was a 1.85 deceleration in CPI inflation. This was partly because of seasonality. Fiscal policy, which included quasi-fiscal activities, has been accommodative. There was the introduction of preferential tax policies in April aimed at supporting SMEs value added tax (VAT). The government also raised business tax thresholds for small and micro business. This move was beneficial to approximately 6 million businesses. In addition, a pilot project to replace business tax with VAT in the transport and other service industries was rolled out nationwide, cutting their tax burden by more than RMB 140 billion in 2013 (Encyclopaedia Britannica, Inc. 2014, p. 227). Moves to abolish central and local government administrative fees continued, reducing the administrative burden for the private sector. Moderating economic activity in the first half of 2013 translated into slower revenue growth, but that growth increased in the 3rd and 4th quarters. Fiscal outcomes for the year 2013 were broadly correspondent to the budget outlined in March, 2013. This implies that the fiscal deficit increased from 1.22% of GDP in 2012 to 2.08% in 2013. This was mostlyassociated to the increase in expenditures. Central and local spending increased by 0.7% points of GDP. Revenues maintainedbroad stability, though revenue growth seemed to be a lagging factor to GDP growth. Against the budget, VAT was 2.0% lower and domestic excise tax was 3.7% lower, shortfalls mainly due to weaker imports and price changes on selected commodities. VAT and excise tax revenues on imports were 11.8% lower than budgeted, and customs duties came in less than expected. However, corporate income tax revenues were 10.1% higher than budgeted, partly due to collection of overdue taxes from previous years and other one-off factors. Land concession fees accounted for more than 50% of local government revenues. Gross revenues generated from land-lease trajected upwards, surpassing the 8% mark for GDP for the 1st quarter of the 2014 financial year (Dept 2014, p. 189). However, in some municipalities, there was a notable decline in real estate activity which resulted in more pressure on land-lease revenues. Land-lease revenues are still average more than 50% of local government revenues. The government introduced revenue and expenditure strategies that would be able to inject stability to the economic growth that is on a downward trend. On April 2, 2014, the State Council announced three measures: first,accelerating urban redevelopment by developing modern social housing units. The China Development Bank will create a special agency to issue home financing bonds; second, relaxing the eligibility criteria for SMEs to qualify for corporate income tax cuts; and third, increasing the pace of expansion of the national rail system. The is approximately RMB 150 billion worth of bonds will be sold this year to build railways in the less developed central and western regions (CMR of Xiamen University 2014, p. 197). The strategy will also see the release of a railway fund that will receive RMB 200 billion 300 billion on an annual basis. These growth stabilizing spending measures are importantly larger as compared to those implemented in 2013. Chinese national economic policy is determined by the State Council, which sets out the five-year plans containing the government’s broad, long-term economic agenda, including targets for urbanization, industrialization and gradual market liberalization. Recent five-year plans have also provided medium-term targets that lay down the path to achieving the long-term objectives. Some examples from the Twelfth Five-year Plan in 2010 include targets for the service industry share of GDP, education completion rates, and reforms to the financial sector, which are expected to be achieved by 2015.1 While the State Council determines the overall objectives of policy, implementation are the responsibility of both local and central government agencies. Bibliography CMR Of Xiamen University. 2014,Chinas Macroeconomic Outlook Quarterly Forecast and Analysis Report, February 2013,Imprint: Springer, Berlin, Heidelberg. Dept, I. M. F. A. A. P. 2014,Peoples Republic of China,International Monetary Fund, Washington. http://public.eblib.com/choice/PublicFullRecord.aspx?p=1770307. Encyclopaedia Britannica, Inc. 2014, Britannica book of the year 2014, Encyclopaedia Britannica, Inc., Chicago. http://public.eblib.com/choice/publicfullrecord.aspx?p=1653023. 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